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Generally, misstatements or concealment of any material facts in an application for insurance, even if unintentional, entitle the insurer to rescind the policy. Insurers, however, cannot rescind an application based on answers given when the applicant was misled by vague or ambiguous questions.

In addition, the misrepresentations must be made by the applicant. Omissions or misstatements by agents of the insurance company are not chargeable to the insured and the insurer will be stopped from rescinding the policy. And the same holds true where the agent misleads the insured to believe that additional disclosures are not required.

In O'Riordan v. Federal Kemper Life Assurance, the life insurance application asked, "Have you smoked cigarettes in the past 36 months?" The applicant (Amy) told the agent (Hoyme) that she had previously been a smoker, but had quit five years ago. She also mentioned that she "might have had a couple of cigarettes in the last couple of years." The agent replied: "That's not really what they're looking for; they're looking for smokers." On the application, the smoking question was marked "no" and the applicant's blood and urine samples showed no traces of nicotine. The insured was issued a term life insurance policy at the preferred nonsmoker rate.

The insured was subsequently diagnosed with metastatic breast cancer and died two days before the policy's two-year contestability period expired. The insurer denied the beneficiary's claim and rescinded the policy on the grounds that the insured had concealed her smoking of cigarettes during the relevant time frame. The beneficiary sued the insurer and the agent.

The California Supreme Court held that the question regarding cigarettes was ambiguous, and that an applicant who has smoked just a couple of cigarettes could correctly answer "no" to the question. As the Court explained, "that inquiry can reasonably be construed as an attempt to determine habitual use, not the smoking of a single cigarette or two during that entire period. Had Kemper intended disclosure of the latter, it could have inquired into the smoking of 'any' cigarette during the relevant period."

The Court also held that, even if the question required disclosure of even a single cigarette smoked during the relevant period, the insured did not conceal that information from the insurer because she did mention it to the agent when she applied for life insurance.

The Court explained that, "once he became Kemper's agent, Hoyme had a duty to disclose to Kemper any material information he had pertaining to Amy's life insurance policy, and Kemper is deemed to have knowledge of such facts... therefore, Hoyme's knowledge of Amy's smoking of one or two cigarettes during the 36 months preceding the application was imputed to Kemper. The fact that the knowledge acquired by the agent was not actually communicated to the principal... does not prevent operation of the rule."

With all of this in mind, it's clear that the O'Riordan decision leaves no doubt that vague or ambiguous questions cannot be the basis for rescission, nor can omissions or misstatements made by the agent. Be sure to provide your clients with all the information necessary for them to make an educated decision and watch your business grow.

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